Insider Trading & Disclosure

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When asked about Martha Stewart's recent trial outcome — in which Stewart was found guilty on four counts of conspiracy, making false statements and obstructing justice — law professor at DePaul University's College of Law, Mary Becker, stated that "it's hard to imagine a male in precisely this spot... targeting a woman is very consistent with dominant cultural values."

oh, shut up

Hearing Becker speak, one would think that attorney generals around the country were scrambling to take down high-profiled women in Corporate America. To Becker, all I can ask is this: When did you ever see former WorldCom CEO Bernie Ebbers, former TYCO CEO Dennis Kozlowski, former Enron CEO Jeffrey Skilling, and former CEO John Rigas in skirts and makeup? (no offense to the Scottish and metrosexuals, of course).

After all, the fate reserved for Martha Stewart was — if anything — very consistent with the wave of righteousness sweeping Corporate America thanks to people like New York Attorney General Eliot Spitzer and his ilk. Mind you, Mr. Spitzer is probably looking out for his own political interests down the road; but, alas, that is another story for another day. In this light, Mary Becker is proving to be nothing more than a "Martha" groupie — still in denial about Stewart's crime and eventual fate. Which begs the questions: what was her crime and what will her fate be?

Let's first examine the facts, and consider how, once again, the media is misrepresenting them.

no insider trading here

First of all, Martha Stewart was never involved in insider trading for she was never an insider at the company whose stock this debacle originated from. While it is true that Martha's crime can be traced back to her ownership of stock in ImClone Systems Inc., she cannot be accused of insider trading since she was never a director or officer at said company.

That being said, Stewart sold stock in ImClone Systems Inc. after getting a tip from her broker that her friend Sam Waksal — then CEO of ImClone — was dumping shares of his company in late 2001, just before the biotech's stock price fell on negative news that had been known to insiders but not the overall investment community. Given that he was an insider and subsequently found guilty of insider trading, he was found guilty of the charges brought against him and is spending seven years in prison. But in itself, Stewart's stock sale — albeit scrupulous, unethical and downright questionable — did not technically represent a crime. So why all the fuss?

what's insider trading?

Insider trading is the selling or buying of company stock by employees, officers or directors. Over time and many scrupulous dealings, insider trading has become synonymous with the illegal buying or selling of securities on the basis of information that is unavailable to the public. This is where matters get dicey.

Global capital markets range from efficient to very inefficient. In finance theory parlance, markets can be strong-form efficient, semi-strong efficient, or weak-form efficient. When a share price reflects all public and private information, the market is strong-form efficient. If a share price reflects only public information (and profits can be earned on the basis of private information), then the market is either weak-form or semi-strong form efficient.